Tag: Credit Risk Management

Rate Shocks, Property Value and Loss Relationship for Bank CRE Loans

Better Management of CRE Credit

When stress testing any given loan, there is a fine but correlated relationship between cash flow, property values, and expected losses. In this article, we gather our data and present a composite CRE benchmark in which to calibrate your bank’s model or expectations. At a minimum, this data will help your bank hone their credit shock assumptions and give you an idea on if you have adequate reserve levels at both the loan and loan portfolio level.

 

The Historical Mistake

 

CRE Pricing Update: 2Q

Commercial Real Estate (CRE) Bank Pricing

As we head into the second quarter, banks are reporting being slightly behind their commercial (C&I) and commercial real estate (CRE) loan budgets for 2017 by 3% to 10%. Higher short-term yields, the delayed evolution of President’s Trump economic agenda, and commercial real estate concentration regulatory pressure have all played a role.  Pricing has remained steady over the first quarter in most markets with some major metro markets experiencing a slight decrease in pricing to the tune of two basis points.

Why Class C Office Loans Are Better Than Class A

The Credit Risk Of Office Lending

Given our position mid-business cycle, it is time for banks to consider decreasing their lending to Class A office space and increasing their exposure to Class C space. This is the opposite of what most banks are doing and the concept of going “down market” is counterintuitive for most bankers at this stage of the economic cycle. After all, don’t you want to lend in the highest quality properties in a downturn? The answer is no and in this article we look at the data plus the logic behind shifting your commercial portfolio to a lower class and more worn properties.

Powerball And The Reason Why Banks Need To Tighten Underwriting Standards

Tightening Bank Underwriting

Tomorrow night’s Powerball lottery will be the world’s richest at an estimated $1.4B. Bankers, despite the odds, are even buying tickets both individually and in syndicates. The ironic part is that with such a big pot, the odds of you winning don’t change (still 1 in 292 million, or about the same as a quarter coming up heads 28 times in a row), but the expected winnings actually go down with a larger jackpot, not up. The higher number of players increases the odds of you splitting the jackpot.

Balance Sheet Rebalancing For Banks In 2016 – The Macro View

Rebalancing Bank Balance Sheets In 2016

The truth is that your bank should discuss balance sheet rebalancing every time credit spreads or rates are expected to materially change, any time the risk tolerance of the bank changes or at least once per year. 2016 just happens to coincide with the start of a rising interest rate cycle so now is the perfect time to have that conversation with your board and management team if you haven’t done so already. Every fund manager knows that making the right asset allocation decision is one of the best ways to stay ahead of the competition.

Why Banks Should Be Increasing Their Loan Loss Allowance

Loan Loss Reserves

Our banking industry has our loan loss allowance provisioning almost exactly wrong. To quote our favorite show, Game of Thrones, winter is coming. We don’t know when the cold weather will be here, maybe the first part of October or maybe around Halloween, but we know it’s coming. Since winter is coming, the question arises - How many coats should we have for the winter? For that answer, we simply look at the data and see what the average daytime temperature over the past three months has been. We see it is a warm 81 degrees.

Your Loan Portfolio’s Private Parts

Quantifying Lending and Credit Risk

Three weeks ago we gave bankers a quick way to translate commercial real estate portfolios into a common rating using simplified methodology (HERE) in order to quickly access their portfolio or a portfolio for purchase. We received many comments from bankers wanting to know more of a detailed approach to accessing credit by loan type and wanting to know how C&I fit into a ratings construct.

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